The ultimate, original massively-multiplayer online game... The authors of this site are not responsible for errors or omissions. The authors are not registered financial advisors. Readers should not view this material as offering investment related advice. The authors present the reporting and commentary for informational purposes only. Information collected and presented are from sources that the authors perceived as reliable, but since the judgment of the authors is subject to error and the information source(s) are beyond the authors' control, no representation or guarantee is made that it is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. The material presented does not constitute specific buy or sell recommendations and is presented solely for informational purposes only. The authors may or may not have positions in the securities and/or options relating thereto, & may make purchases and/or sales of these securities and/or options relating thereto from time to time in the open market or otherwise without prior notice on this blog.

December 29, 2011

2012 Gold Outlook Based On The 10-Year Historical Trend

NOTE: This piece was written during the Christmas holiday. As I publish it on Dec 29 after three hard down days, I see that the lows I was calling for January or February are happening right now.

Its that time of year and so I'll take a twirl with my own 2012 outlook focusing on where my money is: Gold. I'm writing this as I do my analysis so you'll be seeing my thinking as it takes shape. The basis for my thinking is three key ideas:

The 10-year gold bull market is intact. I don't think any of the fundamentals driving the rise in the price of gold are fixed (the unstable and unsustainable exponentially-increasing debt-based financial system). Perhaps more controversially, I don't think the Banksters will, this year, lose their ability to manage the world economy and the price of gold. I think we are in for more of the same, but at an accelerated pace.

August/September 2011 the price of gold got ahead of itself and is now in a significant correction. My failure to see how overextended Gold had become was my biggest trading failure this year. Gary Biiwii was right on top of this, but I didn't listen to him. Woulda, coulda, shoulda.

The best way to estimate the current correction is to look at comparable corrections from earlier in the gold bull market.

(GREEN LINES) Most of the time Gold has been trending higher. The underlying trend as been accelerating as the bull market has proceded (each green line is slanted a little higher than the previous one).

(RED LINES) Four times (culminating in 2006, 2008, 2009 and 2011) gold has gotten ahead of itself in an unsustainable above-trend run. The triggers for these above-trend runs were, in my view:

2006 - accelerating inflation of all commodity prices.

2008 - accelerating inflation of all commodity prices.

2009 - an overhang of central bank intervention to end the 2008 collapse.

2011 - an overhang from central bank intervention in the form of QE2 money-printing.

(BLACK LINES) Each of those unsustainable runs has been followed by an extended, multimonth correction.That's where gold is right now.

The above chart shows how I identified the four above-trend runs. The above-trend runs all culminate with a rise to more than 20% above the 150-day moving average (top red line). Its worth noting that apart from above-trend run corrections the price of gold has fallen no more than 8% below the moving average throughout the bull market (lower green line).

The charts I'm looking at today are all logarithmic scale. That means we can compare percentage price changes by comparing the height of rectangles on the chart. The chart above has for each of the prior corrections a rectangle giving the price change from top to bottom. It also has a rectangle that can be used to estimate the end of 2012 price of gold. This rectangle gives the price change from the high a little more than a year and a quarter out. That's how long it will be from the 2011 high to the end of 2012. I've made a copy of each of these rectangles and moved them to start at the 2011 high. This allows us to see what will happen if the 2011 correction follows one of the earlier corrections. For the 2006 and 2008 corrections this price is less than the previous high. The correction we're having now lasted at least that long prior achieving all-time highs in 2006 and 2008, but not in 2009.

The above chart gives a closer look at the three prior corrections and what they would mean for the current correction. The table that follows gives the numbers.

The above table suggests that the bottom may not be in for the current correction especially if the current correction is like 2008.

Let's look at the 2008 correction a little more closely. The low price of gold, prior to the Lehman brother's bankrucpy was 21% down from the high, a value very close to the 2006 drop. I would argue that the powers-that-be lost control for a few months during the 2008 crisis starting with the Lehman Brothers bankrupcy. I don't expect them to lose control in 2012, but who really knows.

Here's the previous table with the assumption that the Aug 2008 lows were the lows for 2008 (that is, without the post-Lehman brothers collapse). Now the 2008 correction looks a lot like the 2006 correction.

The 2006 and 2008-without-Lehman scenarios are the pattern for my best guess outlook for the price of gold for 2012:

I expect a low around $1500 in January or February.

I expect gold to end up around a little over $1800 at the end of 2012.

Well, that's my outlook with the reasoning behind it. I wouldn't call it bearish, but its certainly not as bullish as many of the predictions I expect you are hearing. I heard one analyst call for $2500 gold in 2012. I'm not the only analyst within the gold-bug community with modest expectations for gold 2012. Even the ever-cheer-leading Eric King could not elicit a bullish-sounding outlook from Pierre Lassonde who is expecting the average price of gold for 2012 end up below the average price for 2011 (click here). I believe Martin Armstrong expects further weakness in early 2011 as well.

The next couple of months are quite strategic. In fact, I think that next Monday, January 2, is very strategic, but the reasoning behind that is for another post. The annual percentage gain from the trend line of the first graph in this post is around 23%/year. If gold can regain and hold the recent uptrend from the first chart in this graph (see above) the target price for the end of 2012 becomes $2020/oz. If it rises above the trend line by some amount (say $75) the target rises accordingly.

It hasn't regained that trend line yet so I'm sticking with my earlier prection. My best guess outlook for the price of gold for 2012:

I expect a low around $1500 in January or February. If the system really starts coming unglued the target price is significantly lower (e.g. $1324).

I expect gold to end up around a little over $1800 at the end of 2012.

While I don't need links to predictions without any substantial reasoning / analysis behind it, I'd be obliged if you'd leave a comment with a link to any other analysts who both provide a quantitative outlook and the reasoning behind it.

Comments

thanks for your very good analysis. i am down 15% in gld and 17% in gold mining fund in just a few weeks.i would like to continue to follow your analysis of gold outlook. i am 82 with a 90 outlook. thanks !!